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While the loonie has dipped below parity to the U.S. dollar amid growing economic uncertainty, Capital Economics says it has much further to fall.
David Madani predicts the loonie will trade as low as 86 cents to the greenback by the end of the 2013.
“Our reasons for thinking so are the prospects of further declines in commodity prices and lower expectations for interest rate differentials between Canada and the U.S.,” Madani says in a note to clients on Tuesday,
Capital Economics expects the price of Brent oil -- the global price for crude -- to hit $85 US by the end of the year. The price of oil has already fallen $30 since early May, as fears of another global economic slowdown has resulted in an exodus of money from commodity markets.
If the euro zone debt crisis worsens, then the price of oil could sink even further. In the midst of the financial crisis of 2008-09 the price of oil fell from over $140 to below $40 in the span of months.
The Canadian economy is also showing signs of weakness -- making it easier for the Bank of Canada to maintain low interest rates. If the central bank were to raise rates before the U.S. Federal Reserve -- as many traders expect -- that would help push the loonie higher.
“Business investment prospects already look less sure than a month ago. The recent drop in Canadian oil prices to below breakeven levels ($60 to $80 per barrel) is troubling given the risk of a prolonged slump in global economic demand, which could prompt producers to shelve investment plans,” he says. “In the meantime, Canadian domestic demand continues to be supported by historically high housing investment, which we think is being driven by misplaced confidence in housing valuations and unsustainably strong household borrowing.”